At Meketa Investment Group, we’ve been hosting emerging and diverse manager research events for years with a goal to facilitate exposure to new managers and, at the same time, share best practices through limited partner and general partner panels. This ongoing dialogue provides insights into the pain points confronting emerging managers. More importantly, the dialogue helps GPs navigate the challenges.

Pain point 1: The working capital conundrum

To even consider launching a fund, would-be managers will have demonstrated some level of success generating returns. Investing acumen is one thing, but the question on the minds of LPs is whether they can build an organisation and culture with the necessary infrastructure to replicate past performance.

Judy Chambers, Meketa Investment Group

It’s easy to underestimate the complexity, time and costs involved with launching a firm. LPs can play a proactive role when they recognise how essential working capital can be to long-term viability. One LP, speaking at Meketa’s April event, said they often couple working-capital investments with fund commitments to emerging managers. Seed capital, alternatively, allows managers to set up their back- and middle-office operations, while signalling to other LPs the institution’s confidence and support.

Pain point 2: The art of securing capital and managing expectations

Nearly all GPs will underestimate the new administrative hats they must wear, not the least of which is investor relations. As several panellists noted, networking and relationship-building is a critical success factor for new firms.

One recurring theme in April’s panel was the value of a narrow approach to networking, whether it’s making concentrated and targeted efforts in a local market or focusing on one specific type of investor – be it endowments and foundations, public pensions, or any other type of asset owner. This allows managers to optimise outreach, impact and even the reporting demands.

Moreover, in managing these relationships over time, it’s important for emerging and diverse managers to maintain a transparent and open dialogue. Every new manager is going to experience hiccups, but how those challenges are communicated is vital. LPs expect challenges. The most successful managers, however, typically acknowledge the challenges when they occur with brutal honesty and clearly communicate strategies to resolve the issues immediately and through successive funds.

Most successful GPs also listen to their investor base. LPs who are committed to their emerging- and diverse-manager programmes are eager to share best practices and they’ve likely seen how other GPs have navigated similar obstacles. But this dialogue can’t happen without trust and transparency.

Pain point 3: Graduation pressures

Graduating from emerging and diverse manager programmes can bring a heightened sense of uncertainty and vulnerability. It’s not uncommon, for instance, that as GPs build their track record and raise new funds, they ascend into a fundraising “forbidden ground” – their new fund is too big for emerging and diverse manager programmes, yet too small for core allocations.

Awareness issues can pose another challenge. As one LP noted, it used to be common that – within an institutional investor – specialists in a given asset class had no visibility into the emerging and diverse manager programmes of the same institutions.

The disconnect underscores the importance of a systematic and holistic approach in building out emerging and diverse manager programmes. It can start at the very outset of a commitment by giving GPs access and exposure to the entire “asset class” team – not just those overseeing emerging manager allocations. Another panellist emphasised that frequent meetings with asset class specialists help align on the criteria that informs fund commitments. Other institutions have created a “transitional pool” of capital, to maintain relationships with the best-performing “matriculating” managers.

Typically, the very best emerging and diverse manager programmes have evolved over time and will continue to adjust as new challenges emerge. But it requires more than just writing a cheque. The LPs that want to be the most impactful appreciate their critical role in helping managers navigate all of the more nuanced challenges that extend beyond investment skill sets they aim to equip and empower.

The author is Judy Chambers, managing principal at Meketa Investment Group.